Intesa Sanpaolo Banka d.d. Bosna i Hercegovina

Transcription

1 Intesa Sanpaolo Banka d.d. Bosna i Hercegovina Financial Statements as at 2014

2 Intesa Sanpaolo Banka, d.d. Financial statements as at 2014 Contents Management Board s Report 2 Responsibilities of the Management and Supervisory Boards for the preparation and approval of the financial statements 3 Independent Auditors Report 4 Income statement 6 Statement of comprehensive income 7 Statement of financial position 8 Statement of changes in shareholders equity 9 Statement of cash flows 11 Notes to the financial statements Page

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7 Income statement for the year ended 2014 Notes Interest income 8 79,781 79,292 Interest expense 9 (24,666) (26,610) Net interest income 55,115 52,682 Fee and commission income 10 19,932 18,639 Fee and commission expense 11 (5,225) (4,743) Net fee and commission income 14,707 13,896 Net trading income 12 1,683 1,853 Other operating income Other operating income 2,419 2,728 Total operating income 72,241 69,306 Personnel expenses 14 (19,393) (18,795) Administrative expenses 15 (17,605) (18,267) Depreciation and amortisation (3,537) (4,030) Operating expenses (40,535) (41,092) Profit before impairment losses and other provisions and income tax 31,706 28,214 Net impairment losses and other provisions 16 (9,835) (13,075) Profit before tax 21,871 15,139 Income tax expense 17 (2,223) (1,710) Net profit for the year 19,648 13,429 Basic and diluted earnings per share (KM) The accompanying notes form an integral part of these financial statements. 6

8 Statement of comprehensive income for the year ended Profit for the year 19,648 13,429 Other comprehensive income for the year Items that may be reclassified subsequently to profit or loss Fair value reserves (available-for-sale financial assets) Change in fair value, net of deferred tax (121) (67) Items that will never be reclassified to profit or loss Purchase of AMEX credit card portfolio, net of deferred tax Other comprehensive income, net of tax (121) 88 Total comprehensive income for the year 19,527 13,517 The accompanying notes form an integral part of these financial statements. 7

9 Statement of financial position as at Notes Assets Cash and cash equivalents , ,972 Obligatory reserve with the Central Bank 20 81,692 73,945 Placements with other banks 21 55,678 29,572 Financial assets available for sale 22 a) 25,084 2,159 Financial assets at fair value through profit or loss 22 b) Loans and receivables from customers 23 1,072,532 1,034,450 Income tax prepayment 1,971 1,764 Other assets 24 9,230 7,525 Property and equipment 25 18,604 20,406 Intangible assets 26 4,493 4,225 Total assets 1,438,219 1,329,291 Liabilities Due to banks and other financial institutions , ,490 Due to customers , ,360 Financial liabilities at fair value through profit or loss 22 b) - 34 Subordinated debt Other liabilities 30 11,287 11,507 Provisions for liabilities and charges 31 3,792 4,145 Deferred tax liability Total liabilities 1,231,719 1,142,318 Equity Share capital 33 44,782 44,782 Share premium 57,415 57,415 Regulatory reserves for credit losses 18,286 18,286 Other reserves and fair value reserves 6,197 6,318 Retained earnings 79,820 60,172 Total equity 206, ,973 Total liabilities and equity 1,438,219 1,329,291 The accompanying notes form an integral part of these financial statements. 8

10 Statement of changes in shareholders equity for the year ended 2014 Issued share capital Share premium Regulatory reserves for credit losses Other reserves Fair value reserves Retained earnings Total Balance as at 1 January ,782 57,415 18,286 6, , ,973 Net profit for the year ,648 19,648 Other comprehensive income Net loss from change in fair value of financial assets available for sale (134) - (134) Deferred tax Total other comprehensive income (121) - (121) Total comprehensive income (121) 19,648 19,527 Balance as at ,782 57,415 18,286 6,305 (108) 79, ,500 The accompanying notes form an integral part of these financial statements. 9

11 Statement of changes in shareholders equity for the year ended 2013 Issued share capital Share premium Regulatory reserves for credit losses Other reserves Fair value reserves Retained earnings Total Balance as at 1 January ,782 57,415 18,286 6, , ,456 Net profit for the year ,429 13,429 Other comprehensive income Net loss from change in fair value of financial assets available for sale (74) - (74) Purchase of AMEX credit card portfolio Deferred tax (17) 7 - (10) Total other comprehensive income (67) - 88 Total comprehensive income (67) 13,429 13,517 Balance as at ,782 57,415 18,286 6, , ,973 On 1 January 2013 the Bank purchased the American Express credit card loan portfolio of Intesa Sanpaolo Card BH d.o.o. Sarajevo, a related party. Since the two entities are ultimately under the control of the same majority shareholder, Intesa Sanpaolo SpA Italy, the transaction was accounted for in accordance with the exception described in IFRS 3 for transactions between entities under common control. Accordingly, the difference between the sale/purchase price of the portfolio and its net book value in the books of the seller has been recorded as a gain within equity. The accompanying notes form an integral part of these financial statements. 10

12 Statement of cash flows Notes Cash flows from operating activities Profit for the period 19,648 13,429 Adjustments for: - depreciation and amortisation 3,537 4,030 - net impairment losses and provisions 9,835 13,075 - net change in provisions for liabilities and charges net interest income (55,115) (52,682) - net change in fair value of financial assets and liabilities at fair value through profit or loss (101) (30) - net gain from disposal of property and equipment (43) (57) - tax expense 2,223 1,710 (19,545) (20,388) Changes in: - placements with other banks (26,114) 10,185 - loans and receivables from customers (44,096) (1,411) - other assets (2,233) 2,363 - obligatory reserve with the Central Bank (7,747) (3,884) - financial assets and liabilities at fair value through profit or loss due to banks (3,872) (70,040) - due to customers 90,745 53,098 - other liabilities (225) 2,900 - provisions for liabilities and charges (130) (130) (13,126) (27,301) Income tax paid (2,430) (1,791) Interest received 76,270 75,873 Interest paid (21,365) (22,959) Net cash from/(used) in operating activities 39,349 23,822 Cash flows from investing activities Acquisition of property and equipment (1,950) (3,267) Proceeds from the sale of property and equipment Acquisition of intangible assets (1,297) (2,472) (Purchase of)/proceeds from financial assets available for sale (22,945) 155 Net cash (used in)/from investing activities (25,373) (5,467) Cash flows from financing activities Repayment of subordinated debt (161) (159) Reserves from portfolio transfer Net cash flow used in financing activities (161) (4) Net increase in cash and cash equivalents 13,815 18,351 Cash and cash equivalents at the beginning of the year , ,621 Cash and cash equivalents at the end of the year , ,972 The accompanying notes form an integral part of these financial statements. 11

13 Notes to the financial statements 1. GENERAL Incorporation and registered activities Intesa Sanpaolo Banka d.d. Bosna i Hercegovina (the Bank ) was registered in the Cantonal Court in Sarajevo on 20 October Its registered address in Sarajevo is Obala Kulina Bana 9a The Bank s main operations are as follows: 1. Accepting deposits from the public, 2. Granting short-term and long-term loans and guarantees to corporate customers, private individuals, local municipalities and other credit institutions, 3. Money market activities, 4. Performing local and international payments, 5. Foreign currency exchange and other banking-related activities, 6. Providing banking services through an extensive branch network in Bosnia and Herzegovina. 2. BASIS OF PREPARATION Statement of compliance These financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ). These financial statements were authorised by the Management Board on 24 February 2015 for submission to the Supervisory Board. Basis of measurement The financial statements have been prepared on the historical or amortised cost basis except for financial assets available for sale and financial assets and liabilities at fair value through profit or loss. Functional and presentation currency These financial statements are presented in thousands of convertible mark ( 000 KM) which is the functional currency of the Bank. Use of estimates and judgments The preparation of financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, revenues and expenses. Results actually recorded upon settlement of transactions which were initially subject to estimates may eventually differ from those estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of revision and future periods if the revision affects both current and future periods. Information on areas with significant uncertainty in the estimates and critical judgments in applying accounting policies that have the most significant effect on the amounts recognised in these financial statements are disclosed in Note 4. 12

14 3. SUMMARY OF ACCOUNTING POLICIES The accounting policies set our below have been consistently applied for all periods presented in these financial statements. (a) Foreign currency transactions Transactions in currencies other than Convertible Marks ( KM ) are initially recorded at the rates of exchange prevailing on the dates of the transactions. Monetary assets and liabilities are translated at the rates prevailing on the reporting date. Non-monetary items carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing on the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated. Profits and losses arising on translation are included in the income statement for the period. The Bank values its assets and liabilities at the middle rate of the Central Bank of Bosnia and Herzegovina valid at the reporting date. The principal rates of exchange set forth by the Central Bank and used in the preparation of the Bank s statement of financial position at the reporting dates were as follows: 2013 EUR 1= KM USD 1 = KM EUR 1= KM USD 1 = KM (b) Interest income and expense Interest income and expense are recognised in the income statement as they accrue using the effective interest rate method. The effective interest rate is the rate that discounts estimated future cash flows of financial assets or liabilities over the life of the financial instrument (or, if appropriate, a shorter period) to its net carrying value. In the calculation of effective interest rates the Bank estimates future cash flows considering all contractual terms, but not future credit losses. Calculation of the effective interest rate includes all paid or received transaction costs, fees and points, which are an integral part of the effective interest rate. Transaction costs include all incremental costs incurred directly in connection with the issuance or acquisition of financial assets or financial liabilities. Interest income and expense recognised in the income statement include interest on financial assets and financial liabilities that are measured at amortised cost calculated using the effective interest rate method. (c) Fee and commission income and expenses Fee and commission income and expenses that are integral part of the effective interest rate on a financial asset or liability are included in the measurement of the effective interest rate. Fee and commission income and expenses, reported as such, comprise mainly fees related to credit card transactions, the issuance of guarantees and letters of credit, domestic and foreign payment transactions and other services and are recognised in the income statement upon performance of the relevant service. (d) Net trading income Net trading income comprises net gains and losses from foreign exchange trading, net gains and losses on financial instruments at fair value through profit or loss, and net gains and losses from the translation of monetary assets and liabilities denominated in foreign currency at the reporting date. 13

15 3. SUMMARY OF ACCOUNTING POLICIES (continued) (e) Dividend income Dividend income is recognised in the income statement when the right to receive income is established. (f) Lease payments Payments made under operating leases are recognised in the income statement on a straight-line basis over the term of the lease. (g) Income tax expenses The income tax charge is based on taxable profit for the year and comprises current and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised directly in other comprehensive income, in which case it is recognised in other comprehensive income. Current tax is the expected tax payable on the taxable income for the year, using the tax rates enacted or substantially enacted at the reporting date and any adjustments to tax payable in respect of previous years. The amount of deferred tax is calculated using the balance sheet liability method whilst taking into account the temporary differences between the carrying amounts of assets and liabilities used for financial reporting purposes and amounts used for income tax purposes. Deferred tax assets and liabilities are recognised using the tax rates that are expected to apply on taxable income in the period in which those temporary differences are expected to be recovered or settled based on tax rates enacted or substantially enacted at the reporting date. The measurement of deferred tax liabilities and deferred tax assets reflects the tax consequences that would follow from the manner in which the enterprise expects at the reporting date to recover or settle the carrying amount of its assets and liabilities. Deferred tax assets and liabilities are not discounted and are classified as non-current assets and/or liabilities in the statement of financial position. Deferred tax assets are recognised only to the extent that it is probable that sufficient taxable future profits will be available against which the deferred tax assets can be utilised. At each reporting date the Bank reassesses unrecognised potential deferred tax assets and the carrying amount of recognised deferred tax assets for indications of potential impairment. (h) Financial instruments Recognition Loans and receivables and other financial liabilities are recognised when advanced to borrowers or received from lenders (settlement date). The Bank recognises financial assets available for sale and financial assets and liabilities at fair value through profit or loss on the trade date which is the date when the Bank commits to purchase or sell the instruments. Classification The Bank classifies its financial instruments in the following categories: loans and receivables, financial assets available for sale, financial assets and financial liabilities at fair value through profit or loss and other financial liabilities. The classification depends on the purpose for which the financial assets and liabilities were acquired. Management determines the classification of financial assets and liabilities upon initial recognition and re-evaluates this classification at each reporting date. i) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determined payments that are not quoted in an active market. Loans and receivables arise when the Bank provides money to a debtor with no intention of trading with these receivable and include placements with and loans to other banks, loans and receivables from customers and balances with the Central Bank. ii) Financial assets available for sale Financial assets available for sale are non-derivatives that are either designated in this category or not classified into any of the other categories. Financial assets classified as available for sale are intended to be held for an indefinite period of time, but may be sold in response to needs for liquidity or changes in interest rates, foreign exchange rates or equity prices. Financial assets available for sale include equity and debt securities. 14

16 3. SUMMARY OF ACCOUNTING POLICIES (continued) iii) Financial assets and financial liabilities at fair value through profit or loss Financial assets and financial liabilities at fair value through profit or loss have two sub-categories: financial instruments held for trading (including derivatives) and those designated by management as at fair value through profit or loss at inception. A financial instrument is classified in this category only if it is acquired or incurred principally for the purpose of selling or repurchasing it in the near term for the purpose of short-term profit taking or designated as such by management at initial recognition. The Bank designates financial assets and financial liabilities at fair value through profit or loss when: the assets or liabilities are managed, evaluated and reported internally on a fair value basis; the designation eliminated or significantly reduced an accounting mismatch which would otherwise have arisen; or the asset or liability contains an embedded derivative that significantly modified the cash flows that would otherwise be required under the contract. Financial assets and financial liabilities at fair value through profit or loss include derivative financial instruments classified as financial instruments held for trading and equity instruments designated by management at fair value through profit or loss. Management has designated equity instruments at fair value through profit or loss because the designation eliminates or significantly reduces an accounting mismatch related to share-based payments, which would otherwise arise. iv) Other financial liabilities Other financial liabilities comprise all financial liabilities which are not at fair value through profit or loss and include amounts due to customers, due to banks and other financial institutions, and subordinated debt. Initial and subsequent measurement Loans and receivables are initially recognised at fair value. After initial recognition, loans and receivables are measured at amortised cost using the effective interest rate method, less any impairment. Financial assets available for sale are measured initially at their fair value plus transaction costs that are directly attributable to the acquisition or issue of the financial asset. Subsequent to initial recognition financial assets available for sale are measured at fair value, except for equity securities that do not have a quoted market price in an active market and whose fair value cannot be reliably measured, which are stated at cost less impairment. Financial assets and liabilities at fair value through profit or loss are initially recognised at fair value. All transaction costs are immediately expensed. Subsequent measurement is also at fair value. Other financial liabilities are initially measured at fair value including transaction costs. Subsequent to initial recognition the Bank measures other financial liabilities at amortised cost using the effective interest rate. 15

17 3. SUMMARY OF ACCOUNTING POLICIES (continued) Recognition of gains and losses on subsequent measurement of financial instruments Gains and losses from changes in the fair value of available-for-sale financial assets are recognised directly in other comprehensive income until derecognition or impairment, when the cumulative amount previously recognised in other comprehensive income is transferred to the income statement. Interest income calculated using the effective interest rate method is recognised in the income statement. Foreign exchange gains and losses on available-for-sale equity instruments are part of the fair value of these instruments and are recognised in other comprehensive income. Dividend income on available-for-sale equity securities is recognised in profit or loss when the right to receive payment has been established. Gains and losses arising from a change in the fair value of financial assets or financial liabilities at fair value through profit or loss are recognised in the income statement. Derecognition The Bank derecognises financial assets (in full or partially) when the rights to receive cash flows from the financial instrument have expired or when it loses control over the contractual rights on those financial assets. This occurs when the Bank transfers substantially all the risks and rewards of ownership to another business entity or when the rights are realised, surrendered or have expired. The Bank derecognises financial liabilities only when the financial liability ceases to exist, i.e. when it is discharged, cancelled or has expired. If the terms of a financial liability change, the Bank will cease recognising that liability and will instantaneously recognise a new financial liability with new terms and conditions. Fair value measurement Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or, in its absence, the most advantageous market to which the Bank has access at that date. The fair value of a liability reflects its non-performance risk. When available, the Bank measures the fair value of an instrument using the quoted price in an active market for that instrument. A market is regarded as active if transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis (Level 1 of the fair value hierarchy). If there is no quoted price in an active market, then the Bank uses valuation techniques that maximise the use of relevant observable inputs and minimize the use of unobservable inputs (Level 2 and Level 3 of the fair value hierarchy). The chosen valuation technique incorporates all of the factors that market participants would take into account in pricing a transaction. The best evidence of the fair value of a financial instrument at initial recognition is normally the transaction price i.e. the fair value of the consideration given or received. If the Bank determines that the fair value at initial recognition differs from the transaction price and the fair value is evidenced neither by a quoted price in an active market for an identical asset or liability nor based on a valuation technique that uses only data from observable markets, then the financial instrument is initially measured at fair value, adjusted to defer the difference between the fair value at initial recognition and the transaction price. Subsequently, that difference is recognised in profit or loss on an appropriate basis over the life of the instrument but no later than when the valuation is wholly supported by observable market data or the transaction is closed out. If an asset or liability measured at fair value has a bid price and an ask price, the Bank measures assets and long positions at the bid price and liabilities and short positions at the ask price. Portfolios of financial assets and financial liabilities that are exposed to market risk and credit risk that are managed by the Bank on the basis of the net exposure to either market or credit risk are measured on the basis of a price that would be received to sell a net long position (or paid to transfer a net short position) for a particular risk exposure. Those portfolio-level adjustments are allocated to the individual assets and liabilities on the basis of the relative risk adjustments of each of the individual instruments in the portfolio. The fair value of a demand deposit is not less than the amount payable on demand. Spot exchange transactions are always considered contributed instruments. Forward currency contracts are not contributed and are treated as financial derivatives pursuant to IAS 39. The Bank recognises transfers between levels of the fair value hierarchy as of the reporting period during which the change occurred. 16

18 3. SUMMARY OF ACCOUNTING POLICIES (continued) Identification and measurement of impairment of financial assets i) Financial assets carried at amortised cost The Bank assesses at each reporting date whether there is any objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is impaired if, and only if, there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset (an incurred loss event ) and that loss event (or events) has (or have) an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Objective evidence of impairment may include indications that the borrower or a group of borrowers is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganisation and where observable data indicate that there is a measurable decrease in the estimated future cash flows from a group of financial assets since the initial recognition of those assets, although the decrease cannot yet be identified for the individual financial assets in the group. For financial assets carried at amortised cost, the Bank first assesses whether objective evidence of impairment exists individually, for financial assets that are individually significant, or collectively, for financial assets that are not individually significant. Those individually significant assets which are not identified as impaired are subsequently included in the basis for collective impairment assessment. For the purpose of a collective evaluation of impairment, financial assets are grouped on the basis of similar credit risk characteristics. If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the assets carrying amount and the present value of estimated future cash flows (excluding future expected credit losses that have not yet been incurred) discounted at the original effective interest rate of financial assets valid at the time the asset become impaired. The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in the income statement. For individually significant loans, the need for, and amount of impairment allowance is determined based on an assessment which includes the sustainability of the counterparty s business plan, its ability to improve performance once a financial difficulty has arisen, the availability of working capital and other financial support, the realisable value of collateral, and the timing of the expected cash flows. 17

19 3. SUMMARY OF ACCOUNTING POLICIES (continued) i) Financial assets carried at amortised cost (continued) Allowances are assessed collectively for losses on loans to customers that are not individually significant and for individually significant loans where there is not yet objective evidence of individual impairment. For the purpose of collective evaluation of impairment the Bank uses statistical models and historical data on the probability of occurrences that cause impairment, the time required to recover and the total loss incurred, adjusted for management s judgement as to whether the current economic and credit conditions are such that it is likely that the actual losses with be higher or lower of those calculated by historical modelling. The Bank regularly reviews the loss rate and the expected rate of recovery at each reporting date, to ensure accurate reporting. If in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the debtor s credit rating), the previously recognised impairment loss is reversed by adjusting the allowance account. The amount of reversal is recognised in the income statement. When a loan is uncollectible, it is written off against the related impairment allowance account. Such loans are written off after all the necessary procedures have been completed and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off are recognised as a reversal of impairment losses in the income statement. The Bank also calculates provisions in accordance with the relevant regulations of the Banking Agency of the Federation of Bosnia and Herzegovina ("the Agency" or "FBA"). In accordance with these regulations, the relevant placements are classified into appropriate risk groups, depending on the past due days, the financial position of the borrower and collateral; and are provided for at prescribed rates. A general provision is also calculated in accordance with these regulations at a rate of 2% on exposure not specifically impaired. The provisions calculated on the basis of the preceding paragraph ( the FBA provisions ) are not recognized in those financial statements of the Bank. However, if the FBA provisions are greater than the impairment allowance calculated in accordance with IFRS, the difference is presented as an appropriation within equity. ii) Financial assets available for sale The Bank assesses at each reporting date whether there is objective evidence that a financial asset or a group of financial assets is impaired. In the case of equity investments classified as available for sale, a significant or prolonged decline in the fair value of the investment below its acquisition cost is considered in determining whether the assets are impaired. If any such evidence exists for financial assets available for sale, the cumulative loss, measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in the income statement, is removed from other comprehensive income and recognised in the income statement. If, in a subsequent period, the fair value of a debt instrument classified as available for sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in profit or loss, the impairment loss is reversed through the income statement. However, any subsequent recovery in the fair value of an impaired available-for-sale equity security is subsequently recognised in other comprehensive income. 18

20 3. SUMMARY OF ACCOUNTING POLICIES (continued) iii) Financial assets carried at cost Financial assets carried at cost include equity securities classified as available for sale for which there is no reliable measure of fair value. The Bank assesses at each reporting date whether there is objective evidence that a financial asset or a group of financial assets is impaired. An impairment loss is calculated as the difference between the carrying amount of the financial asset and the present value of expected future cash flows discounted by the current market interest rate for similar financial assets. Impairment losses on such instruments, recognised in the income statement, are not subsequently reversed through the income statement. Specific financial instruments i) Derivative financial instruments The Bank uses derivative financial instruments to hedge economically its exposure to foreign exchange risks arising from operating, financing and investing activities. The Bank does not hold or issue derivative financial instruments for speculative trading purposes. All derivatives are classified as financial instruments at fair value through profit or loss. Hedge accounting is not applied. Derivative financial instruments include foreign exchange forward contracts and are initially recognised and subsequently measured at their fair value in the statement of financial position. Fair values are obtained from discounted cash flow models. All derivatives are classified as financial assets at fair value through profit or loss when their fair value is positive and as financial liabilities at fair value through profit or loss when it is negative ii) Cash and cash equivalents For the purpose of reporting cash flows, cash and cash equivalents are defined as cash, balances with the Central Bank and current accounts with other banks. Cash and cash equivalents exclude the compulsory minimum reserve with the Central Bank as these funds are not available for the Bank s day-to-day operations. The compulsory minimum reserve with the Central Bank is a required reserve to be held by all commercial banks licensed in Bosnia and Herzegovina. iii) Placements with banks and the obligatory reserve with the Central Bank Placements with banks and the obligatory reserve with the Central Bank are classified as loans and receivables and are carried at amortised cost less impairment losses. iv) Loans and receivables from customers Loans to customers are presented at amortised cost net of impairment allowances to reflect the estimated recoverable amounts. v) Equity securities Equity securities are classified as available for sale and carried at fair value, unless there is no reliable measure of the fair value, in which case equity securities are stated at cost, less impairment. 19

21 3. SUMMARY OF ACCOUNTING POLICIES (continued) vi) Debt securities Debt securities are classified as available-for-sale financial assets and carried at fair value. vii) Borrowings and subordinated debt Interest-bearing borrowings and subordinated debt are classified as other financial liabilities and are recognised initially at fair value, less attributable transaction costs. Subsequent to initial recognition, these are stated at amortized cost with any difference between proceeds (net of transaction costs) and redemption value being recognised in the income statement over the period of the borrowings using the effective interest rate method. viii) Current accounts and deposits from banks and customers Current accounts and deposits are classified as other liabilities and initially measured at fair value plus transaction costs and subsequently stated at their amortised cost using the effective interest method. (i) Property and equipment Property and equipment are stated at historical cost less accumulated depreciation and impairment losses. The cost includes expenditures that are directly attributable to the acquisition of the asset. Subsequent cost is included in net book value or is accounted for as separate assets only if it is probable that the future economic benefits embodied within the part will flow to the Bank and its cost can be measured reliably. The costs of day-to-day repairs and maintenance are recognised in the income statement as incurred. Depreciation is provided on all property and equipment except for land and assets in the course of construction on a straight-line basis at prescribed rates designed to write off the cost over the estimated useful lives of the assets. The depreciation rates used by the Bank are as follows: Computers 20% Furniture and equipment 10% 20% Business premises 1.3% 3% Leasehold improvements 20% Depreciation method and useful lives are reviewed, and adjusted if appropriate, at each reporting date. Gains and losses on disposal are determined by comparing proceeds with the carrying amount, and are included in the income statement as other income or operating expense. (j) Intangible assets Intangible assets are stated at cost less accumulated amortisation and impairment losses. The cost includes all expenditure that is directly attributable to the acquisition of the items. Amortisation is provided on all intangible assets except assets in the course of construction on a straight line basis at prescribed rates designed to write off the cost over the estimated useful lives of the assets. The amortisation rates used by the Bank are as follows: Intangible assets - licenses 10% % Intangible assets - software 20% 20

22 3. SUMMARY OF ACCOUNTING POLICIES (continued) (k) Impairment of non-financial assets The carrying amounts of the Bank s non-financial assets are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, the asset s recoverable amount is estimated. An impairment loss is recognised whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. Impairment losses are recognised in the income statement. The recoverable amount of other assets is the greater of their value in use and fair value less cost to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the asset belongs. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. (l) Employee benefits Short-term benefits On behalf of its employees, the Bank pays pension and health insurance which is calculated on the gross salary paid as well as tax on salaries which are calculated on the net salary paid. The Bank pays the above contributions into the state pension and health funds according to statutory rates during the course of the year. In addition, meal allowances, transport allowances and vacation bonuses are paid in accordance with local legislation. These expenses are recorded in the income statement in the period in which the salary expense is incurred. Obligations for contributions to defined contribution pension plans are recognised as an expense in income statement as incurred. Long-term employee benefits: retirement severance payments and early retirement bonuses The Bank pays to its employees retirement severance benefits upon retirement in an amount representing three times the average salary of the respective employee in the period of the last three months. The obligation and costs of these benefits are determined by using a projected unit credit method. The projected unit credit method considers each period of service as giving rise to an additional unit of benefit entitlement and measures each unit separately to build up the final obligation. The obligation is measured at the present value of estimated future cash flows using a discount rate that is similar to the estimated interest rate on government bonds. Share-based payments Employees of the Bank receive remuneration in the form of share-based payments, whereby employees render services as consideration for equity instruments issued by the ultimate parent company. The Bank accounts for share-based payments as a cash-settled transaction. The fair value of the amount payable to employees in respect of the ultimate parent company shares to be given to the employees is recognised as an expense with a corresponding increase in liabilities over the period in which the employees unconditionally become entitled to payments. The liability is remeasured at each reporting date and at the settlement date. Any changes in the fair value of the liability are recognised as a personnel expense in the income statement. 21

23 3. SUMMARY OF ACCOUNTING POLICIES (continued) (m) Provisions for liabilities and charges Provisions are recognised when the Bank has a present legal or constructive obligation as a result of past events for which it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate of the amount of the obligation can be made. Provisions for liabilities and charges are maintained at the level that the Bank s management considers sufficient for absorption of incurred losses. Management determines the sufficiency of provisions on the basis of insight into specific items; current economic circumstances risk characteristics of certain transaction categories, as well as other relevant factors. Provisions are released only for such expenditure in respect of which provisions are recognised at inception. If the outflow of economic benefits to settle the obligations is no longer probable, the provision is reversed. (n) Share capital Issued share capital Issued share capital comprises ordinary and preference shares and is stated in KM at nominal value. Regulatory reserve for credit losses The regulatory reserve for credit losses represents the surplus of impairment allowances calculated in accordance with regulations as prescribed by the Agency over impairment allowances recognised in accordance with IFRS. The reserve is presented directly within equity (as a non-distributable reserve) and until 2012 any increase of the surplus was covered by transfers from retained earnings, after approval by shareholders. Prior to 2012, the need for transfers from retained earnings to an earmarked reserve within equity (regulatory reserve for credit losses) was calculated for the whole credit-risk portfolio on a net basis, thereby taking into account both instances where application of Agency regulations would have resulted in a higher provision and instances where the application of Agency regulations would have resulted in a lower provision. However, from 2012, banks are required to calculate the requirement for regulatory reserves for credit losses taking into account only instances where higher provisions would have resulted from the application of the Agency rules. Retroactive application of this change in Agency rules is not required. Based on the Decision of Minimum Standards for Capital Management and Asset Classification issued by the Agency in February 2013 any increase of the surplus of regulatory provisions no longer needs to be presented as a reserve movement within equity but will be exclusively computed as a deduction of regulatory capital for the purpose of capital adequacy calculations. Accordingly, the balance of the regulatory reserve presented in the financial statements as of 2012 has been carried forward unchanged to Retained earnings Retained earnings represent the accumulation of net profits after appropriations to owners and other transfers, such as transfers to regulatory reserves as described above. Fair value reserve The fair value reserve comprises changes in fair value of financial assets available for sale, net of deferred tax. Other reserves Other reserves mainly relate to accumulated appropriations from retained earnings in accordance with the shareholder s decisions. Dividends Dividends on ordinary shares and preference shares are recognised as a liability until payment to beneficiaries in the period in which they are approved by the Bank s shareholders. 22

24 3. SUMMARY OF ACCOUNTING POLICIES (continued) (o) Off-balance sheet commitments and contingent liabilities In the ordinary course of business, the Bank enters into credit-related commitments which are recorded off balance sheet and primarily comprise guarantees, letters of credit, undrawn loan commitments and credit-card limits. Such financial commitments are recorded in the Bank s statement of financial position if and when they become payable. (p) Managed funds for and on behalf of third parties The Bank manages funds for and on behalf of corporate and retail clients. These amounts do not represent the Bank s assets and are excluded from the statement of financial position. For the services rendered the Bank charges a fee. (q) Segment reporting A business segment is a distinguishable component of the Bank that is engaged in providing products or services, which is subject to risks and rewards that are different from those of other segments. A geographical segment is engaged in providing products or services within a particular economic environment distinguished from other segments engaged in providing products or services within other economic environments. The Bank has identified 3 primary business segments: Retail, Corporate and Treasury. The primary segmental information is based on the Bank s internal reporting structure by business segment. Geographical concentration is not presented as the Bank s operations are concentrated in Bosnia and Herzegovina. (r) New standards and interpretations A number of new standards and amendments to standards are effective for annual periods beginning after 1 January 2014; however the Bank has not applied the following new or amended standards in preparing these financial statements. IFRS 9 (Financial instruments) published in July 2014, replaces the existing guidance in IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9 includes revised guidance on the classification and measurement of financial instruments, including a new expected credit loss model for calculating impairment on financial assets, and the new general hedge accounting requirements. It also carries forward the guidance of recognition and derecognition of financial instruments from IAS 39. IFRS 9 is effective for annual reposting periods beginning on or after 1 January 2018, with early adoption permitted. The Bank is assessing the potential impact in its financial statements resulting from the application of IFRS 9. Given the nature of the Bank s operations, this standard is expected to have a pervasive impact on the Bank s financial statement. In particular, calculation of impairment of financial instruments on an expected credit loss basis is expected to result in an increase in the overall level of impairment allowances. IFRS 15 (Revenue from Contracts with Customers) establishes a comprehensive framework for determining whether, how much and when revenue is recognised. It replaces existing revenue recognition guidance, including IAS 18 Revenue, IAS 11 Construction Contracts and IFRIC 13 Customer Loyalty Programs. IFRS 15 is effective for annual reporting periods beginning on or after 1 January 2017, with early adoption permitted. The Bank is assessing the potential impact on its financial statements resulting from the application of IFRS 15. The following new or amended standards are not expected to have a significant impact of the Bank s financial statements. Defined Benefit Plans: Employee Contributions (Amendments to IAS 19) Annual Improvements to IFRSs Cycle Annual Improvements to IFRSs Cycle IFRS 14 Regulatory Deferral Accounts Accounting for Acquisitions of Interests in Joint Operations (Amendments to IFRS 11) Clarification of Acceptable Methods of Depreciation and Amortisation (Amendments to IAS 16 and IAS 38). Agriculture: Nearer Plants (Amendments to IAS 16 and IAS 41). Equity Method in Separate Financial Statements (Amendments to IAS 27). Sale or Contribution of Assets between an Investor and its Associate or Joint Venture (Amendments to IFRS 10 and IAS 28). Annual Improvements to IFRSs Cycle various standards. 23

25 4. CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY The Bank makes estimates and assumptions about uncertain events, including estimates and assumptions about the future. Such accounting assumptions and estimates are regularly evaluated and are based on historical experience and other factors such as the expected flow of future events that can be reasonably assumed in existing circumstances, but nevertheless necessarily represent sources of estimation uncertainty. The estimation of impairment losses in the Bank s credit risk portfolio represents the major source of estimation uncertainty. This and other key sources of estimation uncertainty, that have a significant risk of causing a possible material adjustment to the carrying amounts of assets and liabilities within the next financial year, are described below. Impairment losses on loans and receivables The Bank monitors the creditworthiness of its customers on an ongoing basis. The need for impairment of the Bank s on and off-balance sheet exposure to credit risk is assessed on a monthly basis. Impairment losses are made mainly against the carrying value of loans to corporate and retail customers (as disclosed in Note 23) and as provisions for liabilities and charges arising from off-balance exposure to customers, mainly in the form of guarantees and letters of credit (as disclosed in Note 35) and other assets (Note 24). Impairment losses are also considered for credit risk exposures to banks and for other assets not carried at fair value, where the primary risk of impairment is not credit risk. The Bank first assesses whether objective evidence of impairment exists individually for assets that are individually significant (corporate exposures above KM 50 thousand and retail exposures above KM 150 thousand) and collectively for assets that are not individually significant. However, assets assessed individually as unimpaired are then included in groups of assets with similar credit risk characteristics and then assessed collectively for impairment. The Bank estimates impairment losses in cases where it judges that the observable data indicates the likelihood of a measurable decrease in the estimated future cash flows of the asset or portfolio of assets. Such evidence includes delinquency in payments or other indications of financial difficulty of borrowers and adverse changes in the economic conditions in which borrowers operate or in the value or enforceability of security, where these changes can be correlated with defaults. 24

26 4. CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY (continued) (a) Impairment losses on loans and receivables (continued) Summary of impairment allowances: Impairment allowance for balance sheet exposures, including IBNR (Note 23) 88,529 85,215 Provisions for off-balance-sheet, including IBNR (Note 31) 1,435 2,129 89,964 87,344 As at 2014 and 2013, the gross value of impaired loans and receivables (non-performing loans NPL) and the rate of impairment loss recognised were as follows: Corporate Retail Total Corporate Retail Total Gross exposure 89,111 29, ,895 87,041 29, ,693 Impairment allowance (58,243) (20,358) (78,601) (52,433) (21,706) (74,139) Impairment rate 65% 68% 66% 60% 73% 64% An increase in the impairment rate of 1 percentage point of the gross non-performing exposure presented above as at 2014, would lead to the recognition of an additional impairment loss of KM 1,189 thousand (2013: KM 1,167 thousand). In addition to identified losses on impaired loans, as described above, the Bank also recognises impairment losses which are known to exist at the reporting date, but which have not yet been specifically identified ( IBNR ). Amounts, for which specific impairment losses have been identified, are excluded from this calculation. The amount of IBNR as at 2014 amounted to KM 9,928 thousand for balance sheet exposure and KM 1,205 thousand for off-balance-sheet exposure. (2013: KM 11,076 thousand for balance sheet exposure and KM 1,686 thousand for off-balance-sheet exposure). The total IBNR provision amounted to 0.88% (2013: 1.07%) of the relevant on and off-balance-sheet exposure. (b) Taxation The Bank provides for tax liabilities in accordance with the tax laws of the Federation of Bosnia and Herzegovina. Tax returns are subject to the approval of the tax authorities which are entitled to carry out subsequent inspections of taxpayers records. (c) Regulatory requirements The Agency is entitled to carry out regulatory inspections of the Bank s operations and to request changes to the carrying values of assets and liabilities, in accordance with the underlying regulations. In addition to impairment allowances calculated and recognised in accordance with IFRS, the Bank also calculates impairment losses in accordance with the Agency regulations for capital adequacy calculation purposes. 25

27 4. CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY (continued) (c) Regulatory requirements (continued) The following table summarises impairment allowances calculated in accordance with the Agency regulations. Regulatory provisions as of 2014 are calculated in accordance with the new methodology, as explained in Note 3(n): Summary of impairment allowances Provisions for balance-sheet exposure (Agency) 119, ,066 Provisions for off-balance sheet exposure 4,758 4, , ,826 Impairment allowances under IFRS 90,675 87,971 Excess at the year end 33,868 31,855 Prior to 2012, any increase in allowance in accordance with the Agency regulations over amounts recognised under IFRS were required to be transferred to regulatory reserves from profit or retained earnings, upon the decision of the General Assembly. However, as explained in Note 3(n), based on the Decision on Minimum Standards of Capital Management and Asset Classification issued by the Agency in February 2013 any further shortfall in regulatory provisions after 2012 will be adjusted as a deduction of regulatory capital in the capital adequacy calculation without any transfer of this shortfall from retained earnings to regulatory reserves for credit losses within equity. As presented in the above table, total Agency provisions exceeded provisions recognised under IFRS by KM 33,868 thousand as at 2014 ( 2013: KM 31,855 thousand). Out of this amount, KM 18,286 thousand has been recognised as a regulatory reserve for credit losses within equity as at 2014 (31 December 2013: KM 18,286 thousand). The remaining amount of KM 15,582 thousand, which represents the current year shortfall, in line with the new Agency regulation, as explained above, will not be transferred to the regulatory reserves for credit losses, but will be recorded as a reduction of regulatory capital. (d) Litigation and claims The Bank performs an individual assessment of all court cases and creates provisions in accordance with the assessment. The assessment of risks and proposal for provisions for legal cases is performed by the Legal Affairs Department and Finance Division, and a decision on the creation of provisions is made by the Bank s management. As stated in Note 31, the Bank provided KM 1,717 thousand (2013: KM 1,538 thousand), which management estimates as sufficient. Since the estimate is made considering the specifics of each individual case, it is not practicable for management to evaluate the financial impact of changes to the assumptions based on which provisions are quantified as at the reporting date. 26

28 5. FINANCIAL RISK MANAGEMENT The Bank s activities expose it to a variety of financial risks: credit risk, liquidity risk, market risk and operational risk. Market risk includes currency risk, interest rate and other price risk. The Bank has established an integrated system of risk management by introducing a set of policies and procedures for analysis, evaluation, acceptance and risk management. Taking risk is core to the financial services business and the operational risks are an inevitable consequence of being in business. The Management Board has overall responsibility for the establishment and oversight of the Bank s risk management framework. Risk management is carried out by the Risk Management Division whose main purpose is to support financial operations, coordinate access to domestic and international financial markets, and oversee and manage financial risk through internal risk reports including analysis by size and level of the risk. 5.1 Credit risk Risk limit control and mitigation policies The Bank takes on exposure to credit risk which is the risk that the counterparty will be unable to pay amounts in full when due. The Bank structures the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to one borrower, or group of borrowers, and to industry segments. Such risks are monitored on a revolving basis and are subject to an annual or more frequent review. Exposure to credit risk is managed through regular analysis of the ability of borrowers and potential borrowers to meet interest payment and capital repayment obligations and by changing the lending limits where appropriate. Exposure to credit risk is also managed in part by obtaining collateral and corporate and personal guarantees. The limits of credit risk are determined in relation to the Bank s regulatory capital. According to the Bank s policy, decision-making on exposure to credit risk is centralised and concentrated on the Credit Committee. Decisions of the Credit Committees are made upon consideration of proposals provided by the Risk Management Department. The terms for approval of each corporate loan are determined individually depending on client type, the loan s purpose, estimated creditworthiness and current market situation. Conditions for collateral are also determined according to client creditworthiness analysis, type of credit risk exposure, term of the placement as well as the placement amount. Off-balance-sheet credit instruments The primary purpose of these instruments is to ensure that funds are available to a customer as required. Guarantees and letter of credits carry the same risk as loans and are secured with similar collateral as are loans. 27

29 5. FINANCIAL RISK MANAGEMENT (continued) 5.1 Credit risk (continued) Maximum exposure to credit risk before collateral held or other credit enhancement Included in the statement of financial position 2014 Maximum exposure 2013 Current accounts with Central Bank and other banks 136, ,116 Obligatory reserve with the Central Bank 81,692 73,945 Placements with other banks 55,678 29,572 Debt securities available for sale 24,498 1,568 Loans and receivables from customers 1,072,532 1,034,450 Income tax prepayment 1,971 1,764 Other assets excluding repossessed assets 8,960 6,579 Off-balance-sheet exposure Undrawn lending commitments 148, ,822 Financial guarantees and letters of credit 73,469 62,845 Total 1,603,768 1,467,661 For items included in the statement of financial position, the exposures set out above are based on net carrying amounts as reported in the statement of financial position. Off-balance-sheet exposure is also stated net of provisions as reported in the statement of financial position. The above table represents the maximum credit risk exposure of the Bank as at 2014 and 2013, without taking into account any collateral held or other credit enhancements attached. The Bank holds collateral against loans and receivables to customers in the form of mortgages and other securities over assets and guarantees. Collateral value estimates are based on assessments by chartered court surveyors at the time of loan approval, reduced by a haircut at certain fixed percentages. In order to verify the adequacy of the impairment allowance on a continuous basis, collateral reassessments are regularly performed and back-tested in accordance with the principles and rules of the collateral management system, taking into proper consideration the volatility of collateral value and the time needed for its realisation, influenced by the local and global economic trend. Collateral is not held for loans and placements to banks. 28

30 5. FINANCIAL RISK MANAGEMENT (continued) 5.1 Credit risk (continued) Maximum exposure to credit risk before collateral held or other credit enhancement (continued) During the year the Bank obtains financial and non-financial assets by taking possession of collaterals it holds as security or calling on other credit enhancements, in case of failure by the debtors to repay their due amounts. Such process of foreclosure involves mainly real estate, equipment and vehicles. Repossessed items are presented as such in the statement of financial position once they meet the criteria for recognition according to IFRS and local law. The policy of the Bank is to sell repossessed assets; during the period of possession and pending their final sale to third parties, the assets can be temporarily used if they are functional to the Bank s standard operations, or leased operationally to third parties. The gross amount of repossessed assets is presented in the following table: Other assets (Note 24) Property and equipment (Note 25) 4,262 4, Credit risk management and policies for impairment and provisions 4,977 5,081 The Bank accounts for counterparty risks arising from the loan portfolio by making allowances for impaired loans. At each reporting date, the Bank checks the existence of objective evidence of impairment of financial assets, as previously explained in Note 3. Loans and receivables with renegotiated terms The contractual terms of a loan may be modified for a number of reasons, including changing market conditions, customer retention and other factors not related to a current or potential credit deterioration of the customer. The Bank renegotiates loans to customers in financial difficulties to maximise collection opportunities and minimise the risk of default (rescheduling). Rescheduling is mainly performed in response to initial deterioration of the clients financial position or for the prevention of further deterioration of the clients financial position. The revised terms usually include extending the maturity, changing the timing of interest payments and when possible obtaining additional instruments of collateral. Following the restructuring the loans remain graded as restructured until there is sufficient evidence to demonstrate a significant reduction in the risk of non-payment of future cash-flows and there are no other indicators of impairment. For the purpose of credit monitoring and the management of credit risk, the Bank divides its credit portfolio into the following groups: Performing loans loans that are neither past due nor impaired (including rescheduled loans) Past due but unimpaired loans Non-performing loans for which impairment has been recognised. 29

31 5. FINANCIAL RISK MANAGEMENT (continued) 5.1 Credit risk (continued) Credit risk management and policies for impairment and provisions (continued) The analysis of the loan portfolio according to the above-stated categories is presented below: Corporate Loans to customers that are neither past due nor impaired 537, ,127 Past due but not impaired loans 30,848 27,749 Non-performing loans (impaired loans) 89,111 87,041 Gross exposure 657, ,917 Less: impairment allowance (64,742) (60,477) Net exposure 592, ,440 Retail Loans to customers that are neither past due nor impaired 444, ,763 Past due but not impaired loans 29,778 36,333 Non-performing loans (impaired loans) 29,784 29,652 Gross exposure 503, ,748 Less: impairment allowance (23,787) (24,738) Net exposure 480, ,010 Total gross exposure 1,161,061 1,119,665 Portfolio impairment allowance (IBNR) 9,928 11,076 Specific impairment allowances 78,601 74,139 Net exposure 1,072,532 1,034,450 30

32 5. FINANCIAL RISK MANAGEMENT (continued) 5.1 Credit risk (continued) Credit risk management and policies for impairment and provisions (continued) a) Loans to customers that are neither past due nor impaired The quality of the portfolio of loans to customers that are neither past due nor impaired can be assessed through the internal standard monitoring system. Loans to customers are regularly monitored and systematically reviewed in order to identify any irregularities or warning signals. These loans are subject to constant monitoring with the aim of taking timely action based on improvement/deterioration of the client s risk profile. An overview of gross exposure of loans to customers that are neither past due nor impaired according to the type of loan is as follows: Retail loans Corporate loans Consumer loans Housing loans Credit card loans and overdrafts Total Large Other Total 2014 Standard monitoring 268, ,845 50, , , , , Standard monitoring 235, ,873 49, , , , ,127 31

33 5. FINANCIAL RISK MANAGEMENT (continued) 5.1 Credit risk (continued) Credit risk management and policies for impairment and provisions (continued) b) Past due but not impaired loans Loans to and receivables from customers less than 90 days overdue are not considered as impaired, unless other information is available to indicate the contrary. The gross amount of loans to and receivables from customers that were past due but not impaired was as follows: Past due days Gross amount Until 30 days days days Over 90 days 2014 Corporate loans - Large 4,328 4, Other 26,520 25,054 1, ,848 29,382 1, Retail loans - Consumer 15,037 11,802 2, Housing 12,224 9,521 1, Credit Cards and overdrafts 2, , ,778 21,416 6,578 1, Total 60,626 50,798 8,005 1, Past due days Gross amount Until 30 days days days Over 90 days 2013 Corporate loans - Large 1,249 1, Other 26,500 25, ,749 26, Retail loans - Consumer 18,342 15,327 2, Housing 14,572 11,887 2, Credit Cards and overdrafts 3, , ,333 27,412 7,562 1,352 7 Total 64,082 54,043 7,837 2,

34 5. FINANCIAL RISK MANAGEMENT (continued) 5.1 Credit risk (continued) Credit risk management and policies for impairment and provisions (continued) c) Non-performing loans The breakdown of the gross and net amount of the loans to customers that are impaired along with the estimated value of related collateral held by the Bank as security (presented up to the maximum amount of the related exposure), are as follows: Retail loans Corporate loans 2014 Consumer loans Housing loans Credit card loans and overdrafts Total Large Other Total Gross exposure 17,970 8,175 3,639 29,784 12,943 76,168 89,111 Impairment (15,311) (2,296) (2,751) (20,358) (7,489) (50,754) (58,243) Net 2,659 5, ,426 5,454 25,414 30,868 Rate of impairment 85% 28% 76% 68% 58% 67% 65% Estimated value of collateral Cash deposit Mortgage 442 7,777-8,219 7,474 52,634 60,108 Total 453 7,787-8,240 7,474 52,634 60,108 33

35 5. FINANCIAL RISK MANAGEMENT (continued) 5.1 Credit risk (continued) Credit risk management and policies for impairment and provisions (continued) c) Non-performing loans (continued) Retail loans Corporate loans 2013 Consumer loans Housing loans Credit card loans and overdrafts Total Large Other Total Gross exposure 18,043 7,641 3,968 29,652 12,825 74,216 87,041 Impairment (16,966) (1,273) (3,467) (21,706) (6,703) (45,730) (52,433) Net 1,077 6, ,946 6,122 28,486 34,608 Rate of impairment 94% 17% 87% 73% 52% 62% 60% Estimated value of collateral Cash deposit Mortgage 442 7, ,901 10,752 57,404 68,156 Total 457 7, ,919 10,752 57,404 68,156 34

36 5. FINANCIAL RISK MANAGEMENT (continued) 5.1 Credit risk (continued) Concentration of credit risk per geographic location Geographic risk is highly concentrated on the state of Bosnia and Herzegovina. Geographic risk concentrations on net amounts of balance sheet exposure are as follows: Bosnia and Herzegovina OECD countries Non- OECD countries Total As at 2014 Current accounts with the Central Bank and other banks 136, ,789 Obligatory reserves with the Central Bank 81, ,692 Placements with other banks - 55,678-55,678 Debt securities available for sale 24, ,498 Loans and receivables from customers 1,072, ,072,532 Income tax prepayment 1, ,971 Other assets 7,462 1,498-8,960 As at ,324,944 57,176-1,382,120 As at 2013 Current accounts with the Central Bank and other banks 128, ,116 Obligatory reserves with the Central Bank 73, ,945 Placements with other banks - 29,572-29,572 Debt securities available for sale 1, ,568 Loans and receivables from customers 1,034, ,034,450 Income tax prepayment 1, ,764 Other assets 5,445 1,134-6,579 As at ,245,288 30,706-1,275,994 35

37 5. FINANCIAL RISK MANAGEMENT (continued) 5.2 Liquidity risk management Liquidity risk is a measure of the extent to which the Bank may be required to raise funds to meet its commitments associated with financial instruments. The Bank maintains its liquidity profiles in accordance with regulations laid down by the Banking Agency. The Bank is exposed to daily calls on its available cash resources from overnight deposits, current accounts, maturing deposits, loan draw downs, guarantees and from margin and other calls on cash-settled derivatives. The Bank does not maintain cash resources to meet all of these needs as experience shows that a minimum level of reinvestment of maturing funds can be predicted with a high level of certainty. The Bank sets limits on the minimum proportion of maturing funds available to meet such calls and on the minimum level of interbank and other borrowing facilities that should be in place to cover withdrawals at unexpected levels of demand. The following tables show the remaining contractual maturities of the Bank s assets and liabilities as at 2014 and 2013, except for financial assets available for sale which have been classified in accordance with their secondary liquidity characteristic as maturing within one month and obligatory reserves which have been classified in the maturity period within one month. Other items of assets and liabilities that have no contractual maturities are classified as having a remaining maturity of over 5 years. Up to 1 month 1 to 3 months 3 months to 1 year 1 to 5 years Over 5 years Total 2014 Assets Cash and cash equivalents 168, ,787 Obligatory reserve with the Central 81, ,692 Bank Placements with other banks 55, ,678 Financial assets available for sale 24, ,084 Financial assets at fair value through profit or loss Loans and receivables from customers Income tax prepayment and other assets Property and equipment and intangible assets ,867 99, , , ,655 1,072,532 11, , ,097 23,097 Total assets 434,234 99, , , ,338 1,438,219 Liabilities and equity Due to banks and other financial institutions 12,786 7,141 83, ,713 26, ,507 Due to customers 456, , , ,822 14, ,517 Financial liabilities at fair value through profit or loss Subordinated debt Other liabilities 11, ,287 Provision for liabilities and charges ,792 3,792 Deferred tax liability Share capital and reserves , ,500 Total liabilities and equity Maturity gap 480, , , , ,320 1,438,219 (45,882) (8,500) 56,715 44,649 (46,982) - 36

38 5. FINANCIAL RISK MANAGEMENT (continued) 5.2 Liquidity risk management (continued) Up to 1 month 1 to 3 months 3 months to 1 year 1 to 5 years Over 5 years Total 2013 Assets Cash and cash equivalents 154, ,972 Obligatory reserve with the Central Bank 73, ,945 Placements with other banks 29, ,572 Financial assets available for sale 1, ,159 Financial assets at fair value through profit or loss Loans and receivables from customers 90, , , , ,255 1,034,450 Income tax prepayment and other assets 9, ,289 Property and equipment and intangible assets ,631 24,631 Total assets 359, , , , ,477 1,329,291 Liabilities and equity Due to banks and other financial institutions 4,130 5,740 90, ,460 31, ,490 Due to customers 378,357 37, , ,262 11, ,360 Financial liabilities at fair value through profit or loss Subordinated debt Other liabilities 11, ,507 Provision for liabilities and charges ,145 4,145 Deferred tax liability Share capital and reserve , ,973 Total liabilities and equity 393,932 43, , , ,560 1,329,291 Maturity gap (34,387) 59,287 (3,098) 11,281 (33,083) - 37

39 5. FINANCIAL RISK MANAGEMENT (continued) 5.2 Liquidity risk management (continued) Future cash flows for interest bearing liabilities The estimated future cash flows for the Bank s interest bearing liabilities, including expected interest as at 31 December 2014 and as at 2013, are shown in the following table: Up to 1 month 1 to 3 months Total expected outflow 3 months to 1 1 to 5 year years Over 5 years Total Carrying value 2014 Liabilities Due to banks and other financial institutions 22,574 41,703 40, ,753 27, , ,507 Due to customers 457,133 58, , ,858 15, , ,517 Subordinated debt Total expected outflow 479, , , ,068 42,591 1,253,341 1,216,627 Up to 1 month 1 to 3 months Total expected outflow 3 months to 1 1 to 5 year years Over 5 years Total Carrying value 2013 Liabilities Due to banks and other financial institutions 4,142 6,112 92, ,078 32, , ,490 Due to customers 380,110 38, , ,832 13, , ,360 Subordinated debt Total expected outflow 384,252 44, , ,540 45,823 1,157,686 1,126,614 38

40 5. FINANCIAL RISK MANAGEMENT (continued) 5.3 Market risk The Bank is exposed to market risk which is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risks arise from open positions in interest rate, foreign currency and equity products, all of which are exposed to general and specific market movements and changes in the level of volatility of market rates or prices such as interest rates, credit spreads, foreign exchange rates and equity prices. The Management Board sets limits and guidelines for monitoring and mitigating market risks which is regularly monitored by the Risk Management Department of the Bank Foreign exchange risk Exposure to currency risk arises from credit, deposit-taking and trading activities and is controlled on a daily basis in accordance with legal and internal limits for each currency as well as in total amounts for assets and liabilities denominated in or linked to foreign currencies. In order to manage foreign exchange rate risk more efficiently, the Bank monitors economic and other business changes in the environment in order to predict possible changes in foreign currency activities, exchange rates, and foreign currency risk. Overall exposure to foreign exchange risks is monitored within Risk Management Department using techniques such as Value-at-Risk ( VaR ) and stress testing. FX Value-at-Risk is an individual, concise, statistical measurement of possible losses in the portfolio. VaR is a measurement of loss under normal movements of risk factors on the market. The likelihood of losses higher than VaR occurring is expected to be low. The main model assumptions are: Being based on the historical methodology 99 percent as a confidence interval for Value-at-Risk computation One-day held period The model covers foreign currency risk valid for foreign currency transactions and positions denominated on foreign currencies; resulting from foreign currency rate volatility. The model can compute VaR at different aggregation levels from a single position to any sub-portfolio level. Therefore, the model allows a detailed analysis of risk profiles for the multi-level portfolio hierarchy and diversity effects occurring. Furthermore, VaR measurement can be expounded based on risk source (risk factors). These features of a more detailed risk monitoring system allow the determination of an efficient limit structure which can be compared through different organisational units. The quality of the implemented risk measurement model is constantly assessed. The Bank performs back-testing of the computed VaR measures with the actual gain and losses for the same period. 39

41 5. FINANCIAL RISK MANAGEMENT (continued) 5.3 Market risk (continued) Foreign exchange risk (continued) VaR backtesting (BAM) Real P/L VaR AMOUNT TIME During 2014 the Bank recorded 16 back-testing exceptions (2013: 20 exception) when actual losses exceeded the daily VAR amount. The Bank is exposed to foreign currency risk when there is no matching between assets and liabilities and off-balance sheet positions due to cash flows denominated in foreign currencies. Portfolio exposure to foreign currency risk arises from portfolio sensitivity to fluctuations in exchange rate values. The degree of foreign currency risk depends on the amount of open positions and the degree of potential change in foreign currency rates. The Bank considers that it is not currently exposed to foreign currency risk related to EUR due to the fact that Convertible Mark is pegged to EURO (1 EUR = KM ). Exposure is more prominent for USD and CHF. The Bank performs stress testing based on the assumption of a 10% increase or decrease in foreign currency rates against the relevant local currency. The sensitivity rate of 10% is used when reporting internally to key management personnel and represents management s assessment of the reasonably possible change in foreign exchange rates. Stress testing is performed on an annual basis. The results of the most recent test performed are presented here below: 2014 Currency Open position (in KM) Stress Test 10% Move Up 10% Move Down CHF 54,000 5,400 (5,400) GBP 4, (400) USD (376,000) (37,600) 37,600 HRK 27,000 2,700 (2,700) CAD 13,000 1,300 (1,300) SEK 32,000 3,200 (3,200) other 95,000 9,500 (9,500) EUR 4,121,

42 5. FINANCIAL RISK MANAGEMENT (continued) 5.3 Market risk (continued) Foreign exchange risk (continued) 2013 Currency Open position (in KM) Stress Test 10% Move Up 10% Move Down CHF 70,000 7,000 (7,000) GBP 9, (900) USD (201,000) (20,100) 20,100 HRK 25,000 2,500 (2,500) CAD 6, (600) AUD 31,000 3,100 (3,100) other 57,000 5,700 (5,700) EUR (7,168,000) - - The analysis outlined above is based on the open foreign currency position of the Bank, which includes all asset and liability and off-bs positions. If the currency position of a foreign currency is long (assets exceeding liabilities) and the exchange rate for this currency increases/(decreases) in relation to the KM, the Bank will experience a foreign exchange gain/(loss). If the currency position of a foreign currency is short (liabilities exceeding assets) and the exchange rate for this currency (increases)/decreases in relation to KM, the Bank will experience a foreign exchange (loss)/gain. The Bank takes on exposure to effects of fluctuations in the prevailing foreign currency exchange rates on its financial position and cash flows. The Bank monitors its foreign exchange (FX) position for compliance with the regulatory requirements of the Banking Agency of the Federation of Bosnia and Herzegovina established in respect of limits on open positions. The Bank seeks to match assets and liabilities denominated in foreign currencies to avoid foreign currency exposures. 41

43 5. FINANCIAL RISK MANAGEMENT (continued) 5.3 Market risk (continued) Foreign exchange risk (continued) Foreign exchange position The table below summarises the Bank s exposure to foreign currency exchange rate risk at 2014 and 31 December Included in the table are the Bank s assets and liabilities at carrying amounts categorised by currency. The Bank has a number of agreements governed by a foreign currency clause. The KM value of principal in such agreements is determined by the movement in foreign exchange rates. The principal balance of the related exposure is included in the table below in the column EURO linked. The Bank had the following significant currency positions: EURO linked EURO total Other FX KM Total 2014 EURO USD Assets Cash and cash equivalents 21,512-21,512 1,059 6, , ,787 Obligatory reserves with the Central Bank ,692 81,692 Placement with other banks 39,594-39,594 16, ,678 Financial assets available for sale ,037 25,084 Financial assets at fair value through profit or loss Loans and receivables from customers , , ,895 1,072,532 Income tax prepayment ,971 1,971 Other asset 1,049-1, ,990 9,230 Property and equipment and intangible assets ,097 23,097 Total assets 62, , ,787 17,496 6, ,553 1,438,219 Liabilities and equity Due to banks and other financial Institutions 255, , , ,507 Due to customers 411,313 79, ,937 17,713 6, , ,517 Subordinated debt Other liabilities ,495 11,287 Provision for liabilities and charges ,792 3,792 Deferred tax liability Share capital and reserves , ,500 Total liabilities and equity 667,768 79, ,392 17,954 6, ,203 1,438,219 Net foreign exchange position (604,850) 642,245 37,395 (458) (287) (36,650) - 42

44 5. FINANCIAL RISK MANAGEMENT (continued) 5.3 Market risk (continued) Foreign exchange risk (continued) EURO linked EURO total Other FX KM Total 2013 EURO USD Assets Cash and cash equivalents 8,454-8, , , ,972 Obligatory reserves with the Central Bank ,945 73,945 Placement with other banks 14,180-14,180 15, ,572 Financial assets available for sale ,120 2,159 Financial assets at fair value through profit or loss Loans and receivables from customers 2, , , ,923 1,034,450 Income tax prepayment ,764 1,764 Other asset 1,002-1, ,493 7,525 Property and equipment and intangible assets ,631 24,631 Total assets 26, , ,167 16,260 5, ,206 1,329,291 Liabilities and equity Due to banks and other financial institutions 258, , , ,490 Due to customers 388,993 59, ,277 16,887 5, , ,360 Financial liabilities at fair value through profit or loss Subordinated debt Other liabilities 1,299-1, ,082 11,507 Provision for liabilities and charges ,145 4,145 Deferred tax liability Share capital and reserves , ,973 Total liabilities and equity 648,529 59, ,813 17,020 5, ,915 1,329,291 Net foreign exchange position (621,726) 661,080 39,354 (760) 115 (38,709) - 43

45 5. FINANCIAL RISK MANAGEMENT (continued) 5.3 Market risk (continued) Interest rate risk Interest rate risk is defined as the exposure of a Bank s financial condition to adverse movements in interest rates, referring to the banking book, meaning the set of on- and off-balance-sheet financial assets and liabilities which are part of the core lending and deposit collecting activities performed by the Bank. The Bank is exposed to interest rate risk as the Bank borrows and lends funds at both fixed and floating interest rates. The risk is managed by the Bank by maintaining an appropriate mix between fixed and floating rate borrowings and lending. Interest rate risk reflects the possibility of loss of profit and/or erosion of capital due to a change in interest rates. It relates to all products and balances that are sensitive to changes in interest rates. This risk comprises two components: income component and investment component. The income component arises from a lack of harmonisation between the active and passive interest rates of the Bank (interest on placements is fixed, interest for liabilities is floating and vice versa). The investment component is a consequence of the inverted relationship between price and interest rate fluctuations of securities. The Bank strives to protect itself from interest rate risk by harmonizing the type of interest rate (fixed and floating), currency, related interest rate and the date of interest rate change for all products for which it concludes contracts (which are sensitive to interest rate changes). Any mismatch among the abovementioned elements results in exposure of the Bank to interest rate risk. The adopted system operates at an analytical level commensurate to the complexity and risk of the banking book, and ensures that the risk profile can be examined from two separate, but complementary, perspectives: The economic value perspective, which considers the impact of changes in interest rates and related volatilities on the present value of all future cash flows; The earnings perspective, focused on analysing the impact that changes in interest rates and related volatilities generate on the net interest income and, therefore, on the related effects on interest margin. The Bank uses the following methods to measure interest rate risks: Shift sensitivity of fair value; Shift sensitivity of the interest margin. The shift sensitivity of fair value measures the changes in economic value of a financial portfolio resulting from a parallel shift in the discount curves. The total value of shift sensitivity is broken down by time bucket (bucket analysis), in order to identify the distribution of risk over the time axis. The operating limit currently in force for shift sensitivity of fair value (by +100 bp parallel shift of yield curves) amounts to KM 5,867 thousand (EUR 3,000 thousand). The limit is set up by the Bank with the aim of keeping exposure within low levels which are compatible with self-imposed risk parameters. 44

46 5. FINANCIAL RISK MANAGEMENT (continued) 5.3 Market risk (continued) Interest rate risk (continued) If changes in interest rates had been 100 basis points higher and all other variables were held constant at 2014, the effect is KM 3,076 thousand ( 2013: KM 3,887 thousand). The results of the analysis of the shift sensitivity of fair value are below the current operating limit and are presented in the table below: Shift Sensitivity (+100 bp) EUR 2,786 2,992 USD CHF 13 - KM Other currencies 2 12 Total 3,076 3,887 The sensitivity of the interest margin quantifies the short-term (twelve months) impact on the interest margin of a parallel, instantaneous and permanent shock in the interest rate curve. This measure highlights the effect of changes in interest rates on the portfolio being measured, excluding assumptions on future changes in the mix of assets and liabilities and, therefore, it cannot be considered a predictor of the future levels of the interest margin. The result of shift sensitivity of the interest margin, if changes in interest rates market moving had been 100 basis points higher/lower and all other variables were held constant at 2014 is an increase/decrease of KM 2,940 thousand ( 2013: KM 3,532 thousand). In addition, the Bank also prepares shift sensitivity of the interest margin based on the sensitivity range of +50/-50 bps. Increase by 50 bps of interest rates would increase the result for the year by KM 1,476 thousand, while a decrease by 50 bps in interest rates would decrease result for the year by 592 thousand as of 2014 ( 2013: KM +/-1,766 thousand). In order to measure the Bank's vulnerability under stressful market conditions the interest rate risk measurement system adopted by the Bank allows a meaningful evaluation of the effect of stressful market conditions on the Bank ( scenario analysis ), or rather abrupt changes in the general level of interest rates, changes in the relationships among key market rates (i.e. basis risk), changes in the slope and the shape of the yield curve (i.e. yield curve risk), changes in the liquidity of key financial markets or changes in the volatility of market rates. 45

47 5. FINANCIAL RISK MANAGEMENT (continued) 5.4 Capital management The Bank s objectives for capital management, which is a broader concept, in the opinion of the Management Board, than the equity shown in the statement of financial position, are as follows: to comply with the capital requirements set by the regulators of the banking markets in the local environment; to safeguard the Bank s ability to continue as a going concern so that it can continue to provide returns for shareholders and benefits for other stakeholders; and to maintain a strong capital position to support the development of its business activities. Capital adequacy and the use of regulatory capital are monitored daily by the Bank s management, employing techniques based on the guidelines developed by Banking Agency of Federation of Bosnia and Herzegovina for supervisory purposes. The required information is filed with the Agency on a quarterly basis. The Bank s regulatory capital for monitoring adequacy according to the Agency s methodology consists of: Tier 1 Capital or Core Capital: share capital (net of the carrying value of treasury shares), share premium, retained earnings and reserves created by appropriations of retained earnings; amount of negative revaluation reserves arising from the effects of changes in the fair value of assets and audited profit for the current period, upon approval and retention by the General Shareholders Assembly (from 2014); Tier 2 Capital or Supplementary Capital: qualifying principal amounts of subordinated loan capital, collective impairment allowances and amount of positive revaluation reserves arising from the effects of changes in the fair value of assets; and Deductible items. Risk-weighted assets are measured by means of a hierarchy of four weightings classified according to the nature of and reflecting an estimate of credit, market and other risks associated with each asset and counterparty, taking into account any eligible collateral or guarantees. A similar treatment is adopted for off-balance-sheet exposure, with some adjustments to reflect the more contingent nature of the potential losses. 46

48 5. FINANCIAL RISK MANAGEMENT (continued) 5.4 Capital management (continued) The table below summarises the computation of regulatory capital and the capital adequacy ratio of the Bank as of 31 December 2014 and 2013 (information on risk-weighted assets is unaudited), taken from the calculations submitted to the Agency in respect of those period-ends Tier 1 capital Share capital 44,782 44,782 Share premium 57,415 57,415 Statutory and other reserves 5,939 5,939 Retained earnings brought forward 60,172 46,743 Fair value reserves, negative (122) - Intangible assets (4,494) (4,225) Total qualifying Tier 1 Capital 163, ,654 Tier 2 capital General provisions FBA regulations 24,207 22,656 Fair value reserves, positive Subordinated debt Audited profit for the period - 13,429 Total qualifying Tier 2 Capital 25,190 37,226 Adjustment for shortfall in regulatory reserve (15,582) (13,569) Total regulatory capital 173, ,311 Risk weighted assets (unaudited) On balance sheet 1,048,685 1,000,104 Off balance sheet 121, ,580 Total 1,169,794 1,104,684 Operational risk 84,155 82,967 Total weighted risk 1,253,949 1,187,651 Capital adequacy ratio 13.82% 14.68% In accordance with the Agency regulations, Tier 1 capital does not include the balance on the regulatory reserve for credit losses (KM 18,286 thousand at 2014) which is part of net equity in the statement of financial position. However, general provisions calculated in accordance with Agency rules (KM 24,207 thousand at 31 December 2014) are included as Tier 2 capital. In addition, an adjustment is made for the shortfall in regulatory reserves in respect of any additional requirements calculated at the reporting date (date of submission of the capital adequacy calculation to the Agency, which, in accordance with local regulations, is performed on a quarterly basis). For 2014 this amounted to KM 15,582 thousand (2013: 13,569 thousand). 47

49 5. FINANCIAL RISK MANAGEMENT (continued) 5.4 Capital management (continued) In accordance with Agency regulations, the Decision on minimum standards for capital management of banks and capital protection dated 30 May 2014 (Official Gazette of the Federation of BiH 46/14), audited profit for the year is included in the calculation of regulatory capital from the date when the audited financial statements for the period have been issued and approved by the General Shareholders Assembly. Should the profit for the year ended 2014 be entirely retained, the Capital Adequacy Ratio as of 2014 would be 15.39%. In accordance with Agency regulation applicable as at the date of issuance of the Bank s financial statements for the year ended 31 December 2013, audited profit for the year had to be included in the calculation of regulatory capital if the audited financial statements for the period had been issued and approved by the Supervisory Board before submission of final official financial reports to the Agency. In the above calculation, audited profit for 2013 has been included in the calculation of Capital adequacy as at In addition, in accordance with the Agency Letter from December 2014 (Acknowledgment of items (statements) of core capital in accordance with Provisions of Decision on minimum standards for capital management of banks and capital protection) retained earnings and other reserves should be approved by the General Shareholders Assembly for unconditional, permanent and full coverage of potential future losses in order to be included into Tier 1 Capital of banks before submission of final official financial reports to the Agency due on 5 March The Supervisory Board of the Bank at the meeting held on 9 February 2015 rendered the decision to call an extraordinary General Shareholders Assembly on 3 March 2015 proposing the decisions to the General Shareholders Assembly to approve the allocation of retained earnings and other reserves from profit allocation cumulated in previous periods. The Bank expects this approval to take place on 3 March 2015 and as a result has included reserves and retained earnings in the calculation of Capital adequacy as at 2014 as presented above. 48

50 6. FAIR VALUE OF FINANCIAL INSTRUMENTS The fair values of financial assets and financial liabilities that are traded in active markets are based on quoted market prices or dealer price quotations. For all other financial instruments, the Bank determines fair values using other valuation techniques. 6.1 Valuation models The Bank measures fair values using the following fair value hierarchy, which reflects the significance of the inputs used in making the measurement. Level 1: inputs that are quoted market prices (unadjusted) in active markets for identical instruments. Level 2: inputs other than quoted prices included within Level 1 that are observable either directly (i.e. as prices) or indirectly (i.e. derived from prices). This category includes instruments valued using: quoted market prices in active markets for similar instruments; quoted prices for identical or similar instruments that are considered less than active; or other valuation techniques in which all significant inputs are directly or indirectly observable from market data. Level 3: inputs that are unobservable. This category includes all instruments for which the valuation technique includes inputs not based on observable data and the unobservable inputs have a significant effect on the instrument s valuation. This category includes instruments that are valued based on quoted prices for similar instruments for which significant unobservable adjustments or assumptions are required to reflect differences between the instruments. Valuation techniques include net present value and discounted cash flow models, comparison with similar instruments for which market observable prices exist and other valuation models. Assumptions and inputs used in valuation techniques include risk-free and benchmark interest rates, credit spreads and other premia used in estimating discount rates, bond and equity prices, foreign exchange rates, equity prices and expected price volatilities and correlations. The objective of valuation techniques is to arrive at fair value measurement that reflects the price that would be received to sell the asset or paid to transfer the liability in an orderly transaction between market participants at the measurement date. The Bank determines the fair value of debt securities (treasury bills and bonds) using an internal valuation model which considers their remaining maturity and the latest available auction prices of equivalent instruments. The fair value of foreign currency forward derivatives is estimated using available market data for FX spot and cash curves of relevant currencies. Based on such inputs, forward points and forward rates are computed, which are then used for daily mark-to-market of outstanding deals. The fair value of equity securities classified as available for sale and at fair value through profit or loss traded on an active market is based on closing bid prices at the reporting date for these securities. 49

51 6. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued) 6.2 Financial instruments at fair value fair value hierarchy The following table analyses financial instruments measured at fair value at the reporting date distributed according to the fair value hierarchy. The amounts are based on the values recognised in the statement of financial position Note Level 1 Level 2 Level 3 Total BAM '000 BAM '000 BAM '000 BAM '000 Financial assets available for sale 22 a) Bonds issued by the Federation of Bosnia and Herzegovina - 24,498-24,498 Equity securities issued by non-resident legal entities Financial assets available at fair value 22 b) through profit and loss Equity shares Derivatives held for trading OTC product Total ,546-24, Level 1 Level 2 Level 3 Total BAM '000 BAM '000 BAM '000 BAM '000 Equity securities issued by non-resident 22 a) legal entities Bonds and treasury bills issued by the 22 a) Federation of Bosnia and Herzegovina - 1,568-1,568 Equity shares 22 b) Total financial assets 273 1,606-1,879 Derivatives liabilities held for trading OTC products 22 b) Total financial liabilities

52 6. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued) 6.3 Financial instruments not measured at fair value The following table sets out the fair values of financial instruments not measured at fair value and analyses them by the level in the fair value hierarchy into which each fair value measurement is categorised Level 1 Level 2 Level 3 Total fair value Carrying value BAM '000 BAM '000 BAM '000 BAM '000 BAM '000 Assets Cash and cash equivalents - 31, , , ,787 Obligatory reserve with the Central Bank ,692 81,692 81,692 Placements with other banks - 55,678-55,678 55,678 Loans and receivables from customers - 244, ,276 1,054,549 1,072,532 Total 331,950 1,028,756 1,360,706 1,378,689 Liabilities Due to banks and other financial institutions - 54, , , ,507 Due to customers - 65, , , ,517 Subordinated debt Total - 119,960 1,094,382 1,214,342 1,216, Level 1 Level 2 Level 3 Total fair value Carrying value BAM '000 BAM '000 BAM '000 BAM '000 BAM '000 Assets Cash and cash equivalents - 154, , ,972 Obligatory reserve with the Central Bank - 73,945-73,945 73,945 Placements with other banks - 29,576-29,576 29,572 Loans and receivables from customers - 1,051,767-1,051,767 1,034,450 Total 1,310,260-1,310,260 1,292,939 Liabilities Due to banks and other financial institutions - 264, , ,490 Due to customers - 879, , ,360 Subordinated debt Total - 1,145,123-1,145,123 1,126,614 To improve the accuracy of the valuation estimate the Bank has at the beginning of 2014 implemented revised valuation methodology defined by the Intesa Sanpaolo Group. Movements between Level 2 and Level 3 compared to year 2013 are dependant on the revised approach. 51

53 6. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued) 6.3 Financial instruments not measured at fair value (continued) In estimating the fair value of the Bank s financial instruments and in assigning the instruments to the relevant level of fair value hierarchy, the methods, assumptions and limitations described below apply in accordance with the approach revised at Intesa Sanpaolo Group. Cash and cash equivalents The carrying values of cash and balances with banks are generally deemed to approximate their fair value. Obligatory reserve with the Central Bank is classified as Level 3, as well as, on demand balances versus financial institutions in consideration of the fact that the setting of their exit price could include subjective valuations of the counterparty s credit risk difficult to quantify. Placements with other banks Placements with banks mostly represent overnight and short term deposits; hence there is no significant difference between the fair value of these deposits and their carrying value. Their classification to Level 2 of the fair value hierarchy depends on the absence, or low relevance, of non-observable parameters in setting their exit price. Loans and receivables from customers, amounts due to customers, banks and other financial institutions Fair value is estimated through discounted cash flow method in case of positions with residual medium-long term maturities, while it is approximated with the book value, net of collective impairment/individual adjustment in case of short-term loans, loans payable on demand or with an indefinite maturity for impaired loans. For the purpose of division by fair value level, non performing/impaired assets are classified in Level 3, since the exit price is significantly influenced by the forecasts for losses determined by the credit officer based on future cash flow expectations and the related collection schedules. This entity specific assessment component outweighs other components (as, for example market interest rates), leading to attribution of Level 3 in the hierarchy. Performing loans with original maturity equal or lower than 12 months, as well as short-term liabilities to customers and banks are classified into Level 2 of the fair value hierarchy, due to the absence or low relevance of non-observable parameters in setting their exit prices. Medium-long term loans and liabilities with customers, banks and other financial institutions are classified into Level 3 of the fair value hierarchy, considering the relevance of entity specific assessment components in estimating the exit price. 52

54 7. OPERATING SEGMENTS On a regular basis, the Bank s management analyses the overall results of the Bank with reference to the contributions by individually significant operating segments. Corporate, Retail and Treasury business lines have been identified as relevant operating segments, insofar as financial products managed by each of them and the respective counterparties with whom each segment enters into negotiation are specific for each segment and are not managed by / related to any of the others. Even though lending and fund collection are actually performed by all operating segments, the financial characteristics of the loans, deposits and credit lines managed are specifically designed for each of them and are applicable only to counterparties related to each specific segment. The financial results of each operating segment are recorded through a combined methodology of direct and indirect allocation of income and cost. Income is mainly directly allocated to the respective segment where it was generated, while costs are directly allocated whenever they are identified as immediately generated within the operating segment and are indirectly charged to the operating segments whenever they are sustained by central organisational units. An internal transfer rate methodology is also applied for allocation of the cost of funding to the operating segments. Income statement items in the tables presented below on segment information are in the format used for management reporting purposes. 53

55 7. OPERATING SEGMENTS (continued) Segmental information for the year ending 2014 Retail Corporate Treasury Total Interest income 42,229 37, ,781 Interest expense (13,630) (10,204) (832) (24,666) Net interest income 28,599 26,982 (466) 55,115 Fee and commission income 14,548 5, ,932 Fee and commission expense (4,102) (792) (331) (5,225) Net fee and commission income 10,446 4,499 (238) 14,707 Net profit of trading activities and foreign exchange ,593 1,683 Other operating income Operating income ,624 2,419 Personnel expense (14,292) (4,538) (563) (19,393) Other administrative expense (13,629) (3,569) (407) (17,605) Depreciation expense (2,986) (497) (54) (3,537) Operating expense (30,907) (8,604) (1,024) (40,535) Profit before impairment losses, and other provisions and income tax 8,714 23,096 (104) 31,706 Impairment losses and provisions 459 (10,292) (2) (9,835) PROFIT BEFORE INCOME TAX 9,173 12,804 (106) 21,871 Income tax (2,223) NET PROFIT FOR THE YEAR 19,648 54

56 7. OPERATING SEGMENTS (continued) Segmental information as at 2014 Retail Corporate Treasury Total Cash and cash equivalents 31, , ,787 Obligatory reserves with the Central Bank ,692 81,692 Placements with other banks ,678 55,678 Financial assets available for sale ,084 25,084 Financial assets at fair value through profit or - - loss Loans and receivables from customers 480, ,520-1,072,532 Other unallocated amounts ,298 TOTAL ASSETS 512, , ,391 1,438,219 Due to banks and other financial institutions - 20, , ,507 Due to customers 487, , ,517 Subordinated debt Other unallocated amounts ,092 TOTAL LIABILITIES 487, , ,473 1,231,719 55

57 7. OPERATING SEGMENTS (continued) Segmental information for the year ending 2013 Retail Corporate Treasury Total Interest income 41,085 37, ,292 Interest expense (13,730) (12,466) (414) (26,610) Net interest income 27,355 25,419 (92) 52,682 Fee and commission income 13,092 5, ,639 Fee and commission expense (3,687) (723) (333) (4,743) Net fee and commission income 9,405 4,787 (296) 13,896 Net profit of trading activities and foreign exchange ,746 1,808 Other operating income Operating income ,855 2,728 Personnel expense (13,936) (4,305) (554) (18,795) Other administrative expense (13,856) (4,011) (400) (18,267) Depreciation expense (3,546) (435) (49) (4,030) Operating expense (31,338) (8,751) (1,003) (41,092) Profit before impairment losses, and other provisions and income tax 5,904 21, ,214 Impairment losses and provisions (3,985) (9,118) 28 (13,075) PROFIT/(LOSS) BEFORE INCOME TAX 1,919 12, ,139 Income tax (1,710) NET PROFITFOR THE YEAR 13,429 56

58 7. OPERATING SEGMENTS (continued) Segmental information as at 2013 Retail Corporate Treasury Total Cash and cash equivalents 26, , ,972 Obligatory reserves with the Central Bank ,945 73,945 Placements with other banks ,572 29,572 Financial assets available for sale - - 2,159 2,159 Financial assets at fair value through profit - - or loss Loans to customers 455, ,440-1,034,450 Other unallocated amounts ,920 TOTAL ASSETS 481, , ,065 1,329,291 Due to banks and other financial institutions - 25, , ,490 Due to customers 426, , ,361 Financial liabilities at fair value through profit or loss Subordinated debt Other unallocated amounts ,669 TOTAL LIABILITIES 426, , ,219 1,142,318 57

59 8. INTEREST INCOME Corporate clients 37,132 37,855 Retail clients 42,229 41,080 Banks and other financial institutions Interest on available-for-sale financial assets Other ,781 79, INTEREST EXPENSE Corporate clients 7,639 9,896 Retail clients 13,005 11,095 Banks and other financial institutions 3,926 5,259 Other ,666 26, FEE AND COMMISSION INCOME Domestic payment transactions 4,072 3,685 Credit card activities 5,962 5,546 Foreign payment transactions 2,647 2,752 FX transactions 1,811 1,827 Guarantees 1,805 1,766 Agency services Other 3,465 2,839 19,932 18,639 58

60 11. FEE AND COMMISSION EXPENSE Credit card operations 3,761 3,270 Central Bank services Domestic payment transactions Guarantees E-banking service ,225 4, NET TRADING INCOME Net foreign exchange losses from the translation of monetary assets and liabilities (106) (4) Net gains from foreign exchange spot trading 1,689 1,782 Net losses / gains on equity securities (1) 45 Net gains on financial instruments at fair value through profit or loss ,683 1, OTHER OPERATING INCOME Income from claims settled by insurance companies and recharges from customers Gain on sale of property Other income PERSONNEL EXPENSES Net salaries 13,202 12,499 Tax and contributions 5,621 5,880 Provisions for liabilities and charges (Note 31) Other expenses ,393 18,795 Personnel expenses include KM 3,172 thousand ( 2013: KM 3,225 thousand) of defined pension contributions paid into the State pension plan. Contributions are calculated as percentage of the gross salary paid. The Bank had 521 employees as at 2014 (528 as at December 2013). 59

61 15. ADMINISTRATIVE EXPENSES Rent and other rent-related expense 3,358 3,058 Telecommunication and post expense 2,607 2,647 Savings deposit insurance and other insurance charges 2,244 2,156 Provisions for liabilities and charges (Note 31) Material expenses 854 1,102 Representation and marketing expense Consultancy and Federal Banking Agency expenses 1,657 1,621 Energy Maintenance expenses 2,519 2,709 Security and transport costs 1,772 2,043 Other costs 963 1,336 17,605 18, NET IMPAIRMENT LOSSES AND PROVISIONS The charge to income statement in respect of impairment losses and provisions is analysed as follows: Net impairment losses and provisions for loans to customers (Note 23) 9,524 11,615 -for other assets (Note 24) for property (Note 25) for off-balance sheet items (Note 31) (694) 942 9,835 13,075 60

62 17. INCOME TAXES Current tax recognised in the income statement 2,223 1,710 Deferred tax recognised in other comprehensive income (Note 32) Income tax recognised in the income statement comprises current tax. The current rate of income tax amounts to 10% (2013: 10%) Profit before income tax 21,871 15,139 Tax calculated at rate of 10% 2,187 1,514 Non-deductible expenses Non-taxable income (1) (308) Income tax expense 2,223 1,710 Average effective income tax rate 10.2% 11.3% 18. BASIC AND DILUTED EARNINGS PER SHARE Net profit (KM 000) 19,648 13,429 Weighted average number of ordinary shares outstanding 447, ,760 Basic earnings per share (KM) CASH AND CASH EQUIVALENTS Current account with the Central Bank 116, ,900 Cash in hand in domestic currency 22,926 18,371 Cash in hand in foreign currency 9,072 8,485 Current accounts with other banks 19,946 6, , ,972 61

63 20. OBLIGATORY RESERVE WITH THE CENTRAL BANK Obligatory reserve 81,692 73,945 The minimum obligatory reserve as of 2014 is calculated in the amount of 10% of deposits and borrowings with maturity up to one year and 7% of deposits and borrowings with maturity over one year, and is calculated on a daily basis, and updated every ten calendar days, in arrears. Local inter-bank deposits, and short-term and long-term deposits and borrowings from non-residents are excluded from the calculation. 21. PLACEMENTS WITH OTHER BANKS Placements with banks 55,678 29,572 Placements with other banks include: cash deposit in the amount of KM 489 thousand placed with non resident banks as security for a guarantee issued by that bank on behalf of a domestic customer as at 2014 and FINANCIAL ASSETS a) Financial assets available for sale Debt instruments Bonds issued by the Federation of Bosnia and Herzegovina 24,498 1,568 24,498 1,568 Equity instruments Equity securities at cost Equity securities at fair value ,084 2,159 62

64 22. FINANCIAL ASSETS (continued) b) Financial assets and liabilities at fair value through profit or loss Financial assets Equity shares designated at fair value through profit or loss Derivatives held for trading Financial liabilities Derivatives held for trading Derivatives held for trading compose foreign currency swaps, details of which are presented in the table below: Financial assets 2014 Notional amount Fair value Notional amount Fair value Derivatives classified as held for trading OTC products Forward foreign exchange contracts Financial liabilities 2014 Notional amount Fair value Notional amount Fair value Derivatives classified as held for trading OTC products Forward foreign exchange contracts

65 23. LOANS AND RECEIVABLES FROM CUSTOMERS Short-term loans Corporate - in KM and KM linked to foreign currency 279, ,263 - in foreign currency 1,515 1,728 Retail - in KM and KM linked to foreign currency 62,232 61,647 - in foreign currency , ,638 Long-term loans Corporate -in KM and KM linked to foreign currency 373, ,831 -in foreign currency 2,967 5,095 Retail -in KM and KM linked to foreign currency 441, ,036 -in foreign currency , ,027 Total loans 1,161,061 1,119,665 Less: impairment allowance (88,529) (85,215) 1,072,532 1,034,450 Loans and receivables from customers are presented including accrued interest in the amount of KM 8,977 thousand (2013: KM 9,076 thousand), and net of deferred fees in the amount of KM 4,845 thousand (2013: KM 3,903 thousand). As of 2014, the net amount of short-term and long-term loans in domestic currency includes loans disbursed and repayable in domestic currency index-linked to the KM:EUR exchange rate in the amount of KM 5,111 thousand and KM 716,758 thousand, respectively ( 2013: KM 18,914 thousand and KM 701,450 thousand, respectively). Movements in the provision for impairment of loans and receivables are summarised as follows: Balance as at 1 January 85,215 82,340 Net charge to income statement (Note 16) 9,524 11,615 Unwinding of discount (2,862) (3,054) Transfer based on migration of AMEX portfolio Transfers other Write-offs (3,401) (5,897) Balance as at 88,529 85,215 64

66 23. LOANS AND RECEIVABLES FROM CUSTOMERS (continued) Concentration of credit risk by industry: Economic sector risk concentration in the gross amount of loans and receivables is as follows: Trade 247, ,824 Manufacturing, agriculture, forestry, mining and energy 219, ,864 Construction industry 43,966 38,993 Services, finance, sport, tourism 39,786 34,709 Administrative and other public institutions 42,032 18,781 Transport and telecommunications 36,620 42,457 Other 27,711 25,289 Citizens 503, ,748 1,161,061 1,119, OTHER ASSETS Prepaid expenses 2,061 2,126 Fees receivable Receivables from card operations 1,895 1,851 Assets acquired upon foreclosure of loans Other assets 4,705 2,771 Total other assets 10,362 8,575 Less: impairment allowance (1,132) (1,050) 9,230 7,525 The movement in the impairment allowance for other assets are summarised as follows: Balance as at 1 January 1,050 2,193 Net charge to income statement (Note 16) Transfer to property and equipment impairment (357) (601) Write-offs (97) (810) Balance as at 1,132 1,050 65

67 25. PROPERTY AND EQUIPMENT Cost Land and buildings Computers and other equipment Assets in the course of construction Leasehold improvements Total At 1 January ,248 21, ,642 44,733 Additions - - 1,290-1,290 Transfer from other assets 2, ,579 Disposals - (791) - - (791) Transfers 47 1,024 (1,117) 46 - At ,874 22, ,688 47,811 Additions - - 1,527-1,527 Transfer from other assets Disposals (206) (1,876) - - (2,082) Transfers 147 1,218 (1,536) At ,576 21, ,859 48,034 Accumulated depreciation At 1 January ,278 14,467-7,486 24,231 Charge for the year 325 2, ,053 Transfer from other assets Impairment loss (Note 16) Disposals - (730) - - (730) At ,454 15,861-8,090 27,405 Charge for the year 320 1, ,508 Transfer from other asset Impairment loss (Note 16) Disposals (15) (1,294) - - (1,309) At ,585 16,380-8,465 29,430 At ,420 6, ,406 At ,991 5, ,604 66

68 26. INTANGIBLE ASSETS Cost Software Assets in the course of construction Total At 1 January , ,762 Additions - 2,472 2,472 Transfers 1,203 (1,203) - At ,829 1,405 9,234 Additions - 1,297 1,297 Disposals (174) - (174) Transfers 1,508 (1,508) - At ,163 1,194 10,357 Amortisation At 1 January ,032-4,032 Charge for the year At ,009-5,009 Charge for the year 1,029-1,029 Disposals (174) - (174) At ,864-5,864 At ,820 1,405 4,225 At ,299 1,194 4,493 67

69 27. DUE TO BANKS AND OTHER FINANCIAL INSTITUTIONS Due to banks Current accounts and deposits Demand deposits -in KM in foreign currencies 10, Term deposits -in foreign currencies 44,009 29,577 54,091 30,984 Borrowings Long-term borrowings -foreign banks 183, , , ,437 Due to other financial institutions 237, ,421 Long-term borrowings -in KM 2,418 2,414 -in foreign currencies 18,218 22,655 Total borrowings from other financial institutions 20,636 25, , ,490 Current accounts, deposits and borrowings from banks presented above include accrued interest in the amount of KM 476 thousand (2013: KM 1,305 thousand). Borrowings from other financial institutions are presented including accrued interest in the amount of KM 119 thousand (2013: KM 179 thousand). 68

70 28. DUE TO CUSTOMERS Demand deposits: Retail clients: -in KM 85,689 75,575 -in foreign currencies 47,078 40,851 Corporate clients: -in KM 239, ,181 -in foreign currencies 38,623 43,742 Total demand deposits 410, ,349 Term deposits: Retail clients: -in KM 96,153 82,231 -in foreign currencies 258, ,830 Corporate clients: -in KM 100, ,070 -in foreign currencies 91,087 98,880 Total term deposits 546, , , ,360 Amounts due to customers are presented including accrued interest in the amount of KM 10,258 thousand (2013: KM 7,846 thousand). 29. SUBORDINATED DEBT Ministry of Finance of Bosnia and Herzegovina With the approval of the Banking Agency of Federation of Bosnia and Herzegovina, the subordinated debt may be classified as Tier 2 capital in the calculation of capital adequacy. 69

71 30. OTHER LIABILITIES Loan repaayments before due dates 3,969 3,528 Liabilities to vendors 1,340 1,105 Liabilities for employees bonuses Liabilities in respect of managed funds (Note 37) Credit card liabilities 1,945 2,982 Liabilities to shareholders Other liabilities 2,831 3,602 11,287 11, PROVISIONS FOR LIABILITIES AND CHARGES Provisions for legal proceedings 1,717 1,538 Provisions for retirement employee benefits Provisions for off-balance-sheet credit risk 1,435 2,129 3,792 4,145 70

72 31. PROVISIONS FOR LIABILITIES AND CHARGES (continued) Movement in provisions for liabilities and charges for the year ended 2014 are summarized as follows: Provisions for legal proceedings (Note 15) Provisions for retirement employee benefits (Note 14) Provisions for off-balancesheet credit risk (Note 16) Total Balance at 1 January , ,187 3,196 Net charge to income statement Reductions arising from payments (106) (24) - (130) Balance at , ,129 4,145 Balance at 1 January , ,129 4,145 Net charge/(benefit) to income statement (694) (223) Reductions arising from payments (57) (73) - (130) Balance at , ,435 3,792 The calculation of provisions for retirement benefits of KM 401 thousand as of 2014 (2013: KM 235 thousand) is performed by an independent actuary, applying a discount rate of 5% over the working life and average salary of each employee. Provisions for unused days of vacation of KM 239 thousand as of 2014 (2013: KM 243 thousand) are calculated for every employee, taking as a basis his/her salary and unused days of vacation. 32. DEFERRED TAX LIABILITY The deferred tax liability relates to taxable temporary differences arising on fair value adjustments of financial assets available for sale. The effect of the fair value adjustment, net of relating tax is recognised in equity. The movement of deferred tax liabilities is presented in the table below: Deferred tax liability As at 1 January Decrease in liabilities recognised in the statement of comprehensive income (5) As at As at 1 January Increase in liabilities recognised in the statement of comprehensive income 10 As at

73 33. SHARE CAPITAL 2014 and 2013 Class ES Ordinary shares Class EP Preference shares Total Number of shares 447, ,820 Pair value (KM) Total 44, ,782 Each registered ordinary share carries the right of one vote per share, while preference shares are non-voting. Preference shareholders are entitled to receive dividends when declared, non-cumulatively, with priority rights over the ordinary shareholders in receipt of dividends. The shareholding structure of the Bank as at 2014 and 2013 is as follows: Intesa Sanpaolo Holding International S.A % Other 5.08% 34. SHARE-BASED PAYMENTS In 2012 the Bank purchased 78,028 equity shares representing an interest in the capital of Intesa Sanpaolo SpA (the ultimate majority shareholder of the Bank). The purchase is related to the application of the remuneration policy for the Bank s employees and was accounted for according to the provisions of IFRS 2 Share Base Payments as a cashsettled shared-based payment transaction, insofar the transaction occurred between entities belonging to the same group. During 2014, part of the shares have been transferred to the beneficiaries and as of 2014 the Bank has 31,211 equity shares of Intesa Sanpaolo SpA left in its portfolio of financial assets at Fair Value Through Profit and Loss (with fair value measured based on equity shares quotation on the Milan Stock Exchange). The residual shares will be assigned to beneficiaries when vesting conditions are met. 72

74 35. FINANCIAL COMMITMENTS AND CONTINGENCIES In the ordinary course of business, the Bank enters into credit related commitments which are recorded off-balancesheet and primarily include guarantees, letters of credit and undrawn loan commitments Contingent liabilities Payment guarantees 28,322 25,331 Performance guarantees 42,032 37,124 Letters of credit 3, Total contingent liabilities 73,832 63,393 Commitments Undrawn lending commitments 149, ,403 Total commitments 149, ,403 Total contingent liabilities and commitments 223, ,796 73

75 36. RELATED-PARTY TRANSACTIONS The Bank is a member of the Intesa Sanpaolo S.p.A Group ( Intesa Sanpaolo Group ). The key shareholder of the Bank is Intesa Sanpaolo Holding International S.A., holding 94.92% (2013: 94.92%) of the Bank s shares and the ultimate parent company is Intesa Sanpaolo S.p.A. The Bank considers that it has an immediate related-party relationship with its key shareholders and their subsidiaries; its associates; Supervisory Board members and Management Board members and other executive management ( key management personnel ); and close family members of key management personnel. Related party transactions are part of the Bank s regular operations. The overview of related party transactions as at 2014 and 2013 is presented below: Assets Receivables from key management personnel and their close family members Bank accounts and loans Intesa Sanpaolo Group 40,778 31,252 Financial assets at fair value through profit or loss Intesa Sanpaolo Group 1 - Other receivables Intesa Sanpaolo Group ,153 31,668 Liabilities Deposits key management personnel and their close family members 2,157 1,822 Borrowings and term deposits Intesa Sanpaolo Group 60,576 59,662 Other liabilities Intesa Sanpaolo Group Financial liabilities at fair value through profit or loss Intesa Sanpaolo Group ,051 61,805 Financial commitments and contingencies Undrawn lending commitments Intesa Sanpaolo Group Undrawn lending commitments key management personnel and close family members

76 36. RELATED-PARTY TRANSACTIONS (continued) Income Interest income key management personnel and close family members Interest income Intesa Sanpaolo Group Other Income Intesa Sanpaolo Group Expenses Interest expense key management personnel and close family members Interest expense Intesa Sanpaolo Group 735 1,508 Other expenses Intesa Sanpaolo Group 3,372 3,118 4,187 4,744 The remuneration of key management personnel were as follows: Net salaries for key management personnel Taxes and contributions on net salaries Bonuses to management Compensation for Supervisory Board members Other management benefits ,317 1,385 75

77 37. MANAGED FUNDS The Bank manages assets on behalf of third parties. These assets are recorded separately from the Bank s assets Liabilities Government organisations 8,714 8,971 Associations and Agencies 1,336 2,443 Banks and insurance companies 7,679 - Other Total 18,159 11,847 Assets Loans to companies 17,673 11,276 Loans to citizens Total 18,078 11,740 Amounts due to original creditors managed funds (Note 30)